Hedge funds reduced wagers on a rally in commodities to the lowest this year on mounting speculation that Greece will leave the euro, slowing global growth and curbing demand for everything from copper to soybeans.
Money managers reduced net-long positions across 18 U.S. futures and options by 15 percent to 616,841 contracts in the week ended May 15, the lowest since Dec. 27, Commodity Futures Trading Commission data show. Gold bets fell for a second week and to the lowest since December 2008, while copper holdings tumbled 69 percent, the most in five weeks. Cotton wagers dropped to the lowest in five years.
About $4 trillion was erased from the value of global equity markets this month as Europe’s debt crisis escalated. Moody’s Investors Service lowered debt ratings on 16 Spanish banks on May 17, while Fitch Ratings cut Greece’s credit rating on concern that the country may be the first to exit the 17-nation currency bloc. Home prices in China, the biggest metals consumer, fell in a record number of cities last month, government data showed.
“The outlook for commodities is not good,” said Eric Sprott, who runs Toronto-based Sprott Asset Management LP, which manages $9 billion of assets. “The world economies are slowing down. China’s growth rate is softening, and it’s not even debatable whether there will be a recession in Europe.”
The Standard & Poor’s GSCI Spot Index of 24 commodities fell for a third consecutive week, losing 2 percent and capping the longest slump since September. The MSCI All-Country World Index of equities dropped 5.3 percent, and the dollar climbed 1.3 percent against a basket of six major currencies. Treasuries returned 0.7 percent, a Bank of America Corp. index shows.
The GSCI gained 0.7 percent to settle at 633.68 today. Copper rallied as much as 1.9 percent in New York on speculation that China will ease monetary policy to spur economic growth. Oil gained for the first time in seven days in New York, climbing as much as 1.7 percent.
Thirteen of the raw materials tracked by S&P declined last week. Copper tumbled 4.9 percent, the most in 2012, and erased its gains for the year during after-hours electronic trading on May 18. Orange juice fell to the lowest since October 2009 last week, posting a 17 percent slump.
Turmoil in financial markets caused by Europe’s debt crisis may last another two years, German Finance Minister Wolfgang Schaeuble said in a recorded interview broadcast on May 18 on France’s Europe 1 radio station.
Fitch Ratings lowered Greece’s ranking to CCC from B-, saying the strong showing of “anti-austerity” parties in elections on May 6 and subsequent failure to form a government underscored the lack of public and political support for the country’s bailout from the European Union and International Monetary Fund.
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, climbed for 14 consecutive sessions through May 17, the longest winning streak since its inception in 1973. It fell 0.1 percent on May 18 and dropped as much as 0.5 percent today.
Global stimulus programs, especially in China, may help commodities to rebound, said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which manages $335 billion of assets.
The People’s Bank of China cut lenders’ reserve requirements by 50 basis points from May 18. Federal Reserve Chairman Ben S. Bernanke on April 25 said he was prepared to take further action to aid the economy if necessary, even as he signaled that he didn’t see an immediate need to add stimulus with inflation near the Fed’s goal and unemployment falling.
“We are seeing easing moves in China, and that will increase demand for commodities, but investors want to see the actual momentum on main streets before they come back,” Paulsen said. “In the second half, we will see more data that will support bottoming out of prices.”
Investors pulled $611 million from commodity funds in the week ended May 16, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. That was the fourth consecutive week of outflows, the longest slide since October, according to Cameron Brandt, the director of research. Gold and precious-metals funds accounted for $143 million of the outflow, he said.
Total commodity outflows were $1 billion in April and assets under management fell to $429 billion from $435 billion the month before, Barclays Plc said May 17. Tiberius Asset Management AG said its two Commodity Alpha funds were down about 2 percent each in April, lagging behind their respective benchmarks. Losses in agriculture and platinum spurred the declines, the Zug, Switzerland-based company said May 18.
Copper wagers fell for a second consecutive week to 4,833 futures and options, a three-week low. Holdings plunged 74 percent from this year’s peak on April 3. Prices dropped to as low as $3.4315 a pound on May 18. The metal ended last year down 23 percent at $3.436 on the Comex in New York.
Europe uses about 18 percent of the world’s copper, and demand from the region will probably decline 2 percent this year, Barclays estimates.
Funds cut their gold holdings by 15 percent to 78,619 contracts, the lowest since Dec. 9, 2008, CFTC data show. Prices slumped 17 percent since reaching a record $1,923.70 an ounce in New York on Sept. 6 as investors favored the dollar as a haven.
“People were beginning to believe that gold can stand up against all crises, but the last six months proved that theory wrong,” said Donald Selkin, the New York-based chief market strategist at National Securities Corp., which manages about $3 billion of assets. “Gold needs to come back to more realistic levels, which is about $1,100.”
A measure of net-longs for 11 U.S. farm goods dropped 18 percent to 358,940 contracts, the biggest slide since mid-January. Cotton speculators increased their net-short position, or bet on a decline, by 79 percent to 13,068 contracts, the most bearish since May 2007.
“Commodities are headed lower and sending us a signal that global economies are slowing much more than the optimists had expected,” said Clark Yingst, the chief market analyst at New York-based Joseph Gunnar & Co. “Investors should employ caution.”